Background

Most commercial and residential leases or transfers will contain an express clause which requires the tenant or seller to give “vacant possession” at the end of the term or on completion. Should they fail to do so the consequences can be costly. Until now the test for what is meant by vacant possession was based on the Court of Appeal case Cumberland Consolidated Holdings Ltd –v- Ireland, decided in 1946. This case related to the termination of a tenancy and considered that there were two main tests to be satisfied, namely whether the tenant had left chattels behind which made the property unusable and whether the tenant was still using the property for its own purposes.

The new “bright line” test as some are calling it, as set out in the recent decision of Ibrend Estates BV –v- NYK Logistics (UK) Ltd, gives much needed certainty and a sharp reminder to tenants of their obligations.

Facts of the Case

NYK Logistics Limited (“NYK”), the Tenant of a 80,000 sq ft warehouse on the Barbot Hall industrial estate inRotherham brought an appeal to challenge the first instance decision in the Sheffield County Court in favour of its Landlord, Ibrend Estates BV (“Ibrend”). NYK had purported to exercise its rights under a break clause in its lease. The break clause stipulated that NYK was to give Ibrend not less than 6 months written notice and to pay all rent up until 3 April 2009 (the “break date”) and that it delivered up vacant possession of the property on the break date.

NYK served a valid break notice on 26 September 2008 but did not turn its mind to its repair obligations and the drawing up of the schedule of dilapidations until much nearer the break date. In the days leading up to the break date some outstanding repairs were identified by NYK’s surveyors. NYK wanted to carry out these repairs at its own cost rather than pay damages to Irbend and emailed Ibrend’s surveyor to propose that NYK pay a security guard to attend the property for a further week while NYK’s workmen dealt with the repairs. It would not pay any further rent and return the keys on the break date.

No response was received from Ibrend or its agents and between 6-9 April NYK’s workmen were at the property attending to the repairs. The keys were not returned on 3 April, despite NYK emailing Ibrend’s representative to try to make arrangements for their return.

LJ Rimer gave the lead judgment in the appeal and concluded that NYK had not given vacant possession of the property and thus the condition of the break clause had not been satisfied. NKY was therefore bound by the terms of the existing lease. LJ Rimer stated that he did not believe the test in the Cumberland case was applicable in this instance and summarised his understanding of vacant possession as follows:

“It means that at the moment that ‘vacant possession’ is required to be given, the property is empty of people and chattels and that the purchaser is able to assume and enjoy immediate and exclusive possession, occupation and control of it. It must also be empty of chattels, although the obligation in this respect is likely only to be breached if any chattels left in the property substantially prevent or interfere with the enjoyment of the right of possession of a substantial part of the property.”

As a further branch to its argument, NYK averred that Ibrend had waived the lease on the basis that its agent stated that it would collect the keys and thus acknowledged that the lease had terminated. This argument was also rejected.

Commentary

This decision provides a much clearer test as to what is required to give vacant possession at the end of a lease, and by inference, on a sale. Even though NYK had removed all its machinery, the presence of a small number of workmen and a security guard for a few days meant that vacant possession had not been given. Even though Ibrend’s interests were not affected; it did not have new tenants moving in, it would have been advisable for NYK to take a cautious approach and leave the property on the break date.

In these turbulent times many commercial tenants are seeking to make use of their break clauses to secure a better deal. They must ensure that the terms of the break clause are strictly adhered to otherwise they may find themselves tied into an uneconomical lease for the long term. Tenants should think ahead and make sure that they are prepared to comply with any obligations under the lease, particularly with respect to any repairs required and ensure that they have sufficient time to complete these. If there are any concerns that the tenant will not be able to comply fully with the conditions of the break clause it should open a dialogue with the landlord as soon as possible so that the validity of the termination is not subject to later dispute and expense.

For further information please contact Owen Rafferty or the Partner with whom you usually deal.